Choice Hotels International Q1 2025 Earnings Call Transcript

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Provided by Quartr
May 8, 2025

Key Takeaways

  • Choice delivered record first-quarter results with adjusted EBITDA up 4% to $129.6 million and adjusted EPS up 5% to $1.34 per share.
  • Systemwide net rooms growth accelerated 3% year-over-year in Q1, including a 4% gain in more revenue-intense rooms and a pipeline now 98% concentrated in upscale and extended-stay brands.
  • Domestic RevPAR outperformed all chain scales in Q1, with extended stay up 6.8%, economy up 7.1%, and overall indices beating competitors by multiple hundred basis points.
  • Rewards membership grew 8% to over 70 million members, driving a 28% increase in global reward night redemptions and materially boosting direct bookings and guest loyalty.
  • Full-year guidance was updated to reflect macro uncertainty, with domestic RevPAR now expected between –1% and +1% and 2025 EBITDA lowered to $615–$635 million and EPS to $6.90–$7.22.
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Earnings Conference Call
Choice Hotels International Q1 2025
00:00 / 00:00

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Operator

Ladies and gentlemen, thank you for standing by. Welcome to Choice Hotels International's first quarter 2025 earnings call. At this time, all lines are in a listen-only mode. I'll now turn the conference over to Allie Summers, Investor Relations Senior Director for Choice Hotels.

Allie Summers
Allie Summers
Senior Director of Investor Relations at Choice Hotels

Good morning, and thank you for joining us today. Before we begin, we'd like to remind you that during this conference call, certain predictive or forward-looking statements will be used to assist you in understanding the company and its results. Actual results may differ materially from those indicated in the forward-looking statements, and you should consult the company's Forms NQ, 10-K, and other SEC filings for information about important risk factors affecting the company that you should consider. These forward-looking statements speak as of today's date, and we undertake no obligation to publicly update them to reflect subsequent events or circumstances. You can find the reconciliation of our non-GAAP financial measures referred to in our remarks as part of our first quarter 2025 earnings press release, which is posted on our website at choicehotels.com under the Investor Relations section.

Allie Summers
Allie Summers
Senior Director of Investor Relations at Choice Hotels

This morning, Pat Pacious, President and Chief Executive Officer, will speak to our first quarter operating results and update on our strategic priorities, while Scott Oaksmith, Chief Financial Officer, will discuss our financial performance and outlook for the remainder of the year. Following our prepared remarks, we'll be glad to answer your questions. I will turn the call over to Pat.

Pat Pacious
Pat Pacious
President and CEO at Choice Hotels

Thank you, Allie, and good morning, everyone. We appreciate you taking the time to join us. It has been a successful start to the year as the momentum we've created from our strategic investments has carried forward into the first quarter, driving our adjusted EBITDA 4% higher and our adjusted earnings per share 5% higher year-over-year. The investments in our business delivery engine have increased the attractiveness of our brands, resulting in a 3% year-over-year net increase in global rooms in the first quarter, including a 4% net increase for our more revenue-intense rooms. We also continue to excel at what we do best: delivering guests to our franchisees. In the first quarter, we outperformed our chain scales in domestic RevPAR performance, captured demand across multiple regions of the country, and achieved RevPAR index share gains versus competitors.

Pat Pacious
Pat Pacious
President and CEO at Choice Hotels

These results reflect the improved mix of guests that we are now delivering. Today, approximately 40% of our overall mix is business travelers, which we believe is well-balanced between business and leisure travel. Importantly, Choice's business travelers have a relatively resilient profile. These are guests whose job cannot be accomplished without traveling. They comprise key categories such as construction, regional sales, utilities, and medical staffing, and we are now capturing additional longer-term opportunities from companies involved in the substantial infrastructure investments required by GenAI and the push towards the reshoring of American manufacturing. We anticipate these trends will continue to accelerate, and through our deliberate strategic positioning of our portfolio, Choice is poised to capture this demand. Our business travel segment grew 10% year-over-year in the first quarter, driven by both group and business transient travel and supported by our expanding, upscale, and extended-stay portfolio of hotels.

Pat Pacious
Pat Pacious
President and CEO at Choice Hotels

Notably, we achieved an impressive year-over-year revenue increase of over 50% from group travel business in the first quarter. We delivered these strong results despite increased macro uncertainty, demonstrating that our strategy continues to succeed and reinforcing our confidence in our long-term outlook and ability to create value through our strategic investments. As we look to the future, our global pipeline provides a strong platform for long-term growth, with 98% of the rooms within our more revenue-intense brands. This means that our pipeline should generate significantly higher revenue compared to our existing portfolio, driven by a substantial RevPAR premium, a higher average Effective Royalty Rate, and a larger room count per hotel. The versatile business model we have built has allowed us to deliver stable returns and provide diversified avenues of growth throughout different economic cycles.

Pat Pacious
Pat Pacious
President and CEO at Choice Hotels

Historically, in periods of economic uncertainty, our differentiated positioning has enabled us to outperform our peers, gain market share, and emerge stronger. Choice has an increasingly diverse portfolio of well-segmented brands across a wide variety of price points to suit the needs of a broad array of consumers and hotel developers. We have made tremendous progress since we embarked on our distinct strategy to strengthen the company's position in more revenue-intense segments and markets. We have added brands in our strategic growth segments over the past several years and have expanded our domestic mix of more revenue-generating rooms by 11 percentage points to 88% of our system over that period. Notably, the revenue generated by an average hotel in our portfolio has increased 17% over that period.

Pat Pacious
Pat Pacious
President and CEO at Choice Hotels

The addition of these new brands expands our opportunities to grow our hotel franchise system in all market conditions, as they offer both new construction and conversion opportunities for developers to grow their portfolio with us, depending on their needs. In addition, all of our hotels realize the benefits of our increased scale, including our technology investments, more valuable rewards program, and expanded partnerships. Diversification has also made our business more resilient, particularly with our continued growth in the cycle-resilient extended-stay segment. We have increased the size of our extended-stay portfolio by 19% over the past five years to approximately 53,000 rooms, with the segment's pipeline now representing half of the total domestic rooms pipeline. An increased extended-stay footprint gives us even more confidence in the resilience of our business because, in times of uncertainty, we have historically seen demand remain relatively strong for our extended-stay hotels.

Pat Pacious
Pat Pacious
President and CEO at Choice Hotels

We have also strengthened the entire business by attracting higher-income, more resilient customers who have the means to keep spending and traveling through economic cycles. That means we're delivering customers with a greater lifetime value to our franchisees. In fact, half of our customers now have annual household incomes exceeding $100,000, which means they are more than 24% higher than the median national household income and nearly 20% surpass $200,000. At the same time, we expanded our rewards program to over 70 million members, an 8% year-over-year increase as of the end of the first quarter. These loyal customers are six times more likely to book direct through Choice channels and stay an average of 90% more room nights per year than our non-rewards members.

Pat Pacious
Pat Pacious
President and CEO at Choice Hotels

Growth in our membership is the direct result of us creating a more compelling program, including introducing new aspirational hotels and exciting new experiences such as music, racing, and college sport event redemption options, as well as adding new rewards program features. We are seeing the results with a more engaged customer base, as demonstrated by a 28% year-over-year increase in the number of global reward night redemptions during the first quarter. With gas prices trending lower and approximately 90% of our domestic portfolio within one mile of a highway, we provide value-seeking travelers the opportunity to travel and take vacations in a more affordable way closer to home. This is particularly compelling for our customer base, which is comprised primarily of domestic travelers. Additionally, our strong portfolio of mid-scale hotels offers an affordable, high-quality option for travelers who might be seeking to trade down.

Pat Pacious
Pat Pacious
President and CEO at Choice Hotels

Likewise, we see attractive tailwinds coming from one of our core customer segments: baby boomers. Over 4 million people are expected to reach retirement age this year in the U.S., and they have more time and disposable income to travel for leisure and seek brands like ours that provide value for their money. The pool of these retired travelers continues to expand, with more than one in five Americans expected to be 65 years old or over by 2030. Just last week, we hosted our 69th annual convention. The level of enthusiasm and support we heard from our thousands of franchisees about the ways we are driving growth and the future of our brands was remarkable. The convention is also a significant business development opportunity for us to sign new franchise agreements.

Pat Pacious
Pat Pacious
President and CEO at Choice Hotels

During the event, we highlighted some of our recent investments, specifically our new Choice Hotels website and mobile apps, which have helped drive improved performance through strong year-over-year increases in booking conversion rates across all of our chain scales, including double-digit increases for our upscale properties. Our targeted hotel profitability tools, which continue to drive potential cost savings of up to 20% on the franchisee level, and our recently launched One Stop Owners platform, which makes it even easier for our franchisees to access actionable intelligence to run their businesses. Our larger scale has allowed us to invest more in technology to enhance the guest experience and the value we bring to our franchisees. This is one of the key reasons our existing owners choose to expand their hotel portfolio with Choice Hotels and contributes to our industry-leading voluntary franchisee retention rate.

Pat Pacious
Pat Pacious
President and CEO at Choice Hotels

As we look to grow our brand portfolio, we remain very well-positioned. In addition to our proven strength in the mid-scale segment, the company has well-established brands with significant growth potential in the two segments with the highest developer and guest demand: extended stay and upscale limited service. These segments are more accretive to our earnings and continue to be a key driver of our future growth. Continuing to innovate has contributed to us further expanding our lead in the extended stay segment, as we added more than 5,000 extended stay rooms domestically in the first quarter. For seven consecutive quarters, we have grown our domestic extended stay room system size by double digits year-over-year, and we expect this higher-than-industry average growth to continue. With nearly half of the economy and mid-scale extended stay segment rooms currently under construction being Choice Hotels brands, we are well-positioned for future growth.

Pat Pacious
Pat Pacious
President and CEO at Choice Hotels

We also continue to strengthen our core brand portfolio, which outperformed overall mid-scale RevPAR chain scale and attracted strong development growth in the first quarter. Importantly, we recently introduced new value-engineered prototypes for the Comfort brand family and the Country Inn & Suites by Radisson brand that provide more revenue-driving spaces for owners and achieve a 10%-15% reduction in construction costs. We are already realizing returns from these investments. In fact, during the first quarter, our Country Inn & Suites by Radisson brand's RevPAR outperformed the upper mid-scale segment by nearly 2 percentage points. In the upscale segment, we continue to expand our presence, increasing the global room system size by 16% year-over-year to over 110,000 rooms, now representing 17% of our overall system.

Pat Pacious
Pat Pacious
President and CEO at Choice Hotels

With nearly 27,000 more upscale global rooms in the pipeline, an 8% increase over the prior quarter, we will be providing our guests even more aspirational locations to visit. We've often spoken about a key differentiator for our business: the velocity with which we move hotels through our pipeline. I'm pleased to say that velocity in the first quarter accelerated versus the prior quarter. Of the domestic franchise agreements we executed for conversion hotels for the 12 months ending March 31, we opened 170 within that timeframe, a 26% increase compared to the same period of the prior year. This conversion capability benefits Choice as we capture royalties in the system faster, and it benefits our franchise owners who can quickly join our distribution platform and start generating revenues.

Pat Pacious
Pat Pacious
President and CEO at Choice Hotels

We are encouraged by the continued traction for our conversion brands, and we expect this hotel conversion core competency to be a key growth driver this year. I'd now like to turn to another growth area: our international business, where in the first quarter, we expanded our rooms portfolio by over 4% year-over-year. With a rooms pipeline that has increased by 13% compared to the prior quarter, we continue to see a significant opportunity to further gain international market share in the coming years. In closing, by successfully executing our strategy, we have transformed the company to be future-ready and have established a strong foundation for near-term stability and long-term growth. Our proactive investments and a versatile asset-light fee-based model have meaningfully enhanced our company's growth profile and allow us to generate multiple avenues of growth throughout various economic cycles.

Pat Pacious
Pat Pacious
President and CEO at Choice Hotels

We continue to grow our significant free cash flow annually, and our priority use of this capital is to create long-term value as we remain focused on enhancing our value proposition and driving organic growth while returning excess cash to shareholders. I will now turn the call over to our CFO, Scott. Thanks, Pat. Good morning, everyone. Today, I will discuss our first quarter results, update you on our balance sheet and capital allocation, and comment on our outlook for the remainder of 2025. We are pleased with the first quarter results we delivered, which were in line with our expectations despite a weaker-than-anticipated macroeconomic environment. We drove adjusted EBITDA to a first quarter record of $129.6 million, representing a 4% year-over-year increase, highlighted by a combination of global rooms growth, strong RevPAR, robust effective royalty rate growth, and the impressive performance of fees from our partnership programs.

Pat Pacious
Pat Pacious
President and CEO at Choice Hotels

Our first quarter adjusted earnings per share also reached a first quarter record of $1.34 per share, a 5% increase year-over-year. Let me first discuss our key drivers of royalty fee growth, which include unit growth, RevPAR performance, and our royalty rates. In the first quarter, our global rooms grew 3.9% year-over-year across our more revenue-intense upscale, extended stay, and mid-scale portfolio, and our total worldwide rooms grew by 2.8%. We continue to see strong developer interest in our brand portfolio, with particular demand for our extended stay and mid-scale segments. We also recently announced a partnership with the Innovative Bridge platform, which helps optimize the loan search process, providing access to a wider range of affordable financing solutions for hotel owners and developers.

Pat Pacious
Pat Pacious
President and CEO at Choice Hotels

We believe this new partnership will expand access to capital sources and accelerate the timeline to secure financing that will support the development of both new construction and the conversion of hotels into our franchise system. Our deliberate decisions and strategic investments in our franchisee tools, brand portfolio, and partnerships are delivering results across all our brand segments. First, we grew our domestic extended stay room system size by 11% year-over-year, highlighted by a 14% increase in domestic openings. At the same time, we saw a 14% increase in domestic franchise agreements awarded year-over-year. The EverHome Suites brand is gaining strong traction, with 11 hotels now open and 62 domestic projects in the pipeline, including 18 under construction as of today. Second, we further strengthened our presence in the mid-scale segment, highlighted by a 10% increase in mid-scale domestic franchise agreements executed year-over-year.

Pat Pacious
Pat Pacious
President and CEO at Choice Hotels

Our flexible and low-cost conversion Clarion Pointe brand portfolio continues to grow, with a 10% increase in global rooms in the first quarter compared to the prior year. Third, we are continuing to expand our upscale portfolio, with a 16% increase in global rooms year-over-year. Specifically, our Ascend Hotel Collection, a leading global soft brand, reported a 13% year-over-year increase, reaching nearly 59,000 rooms worldwide. Turning now to our RevPAR performance, our first quarter domestic RevPAR outperformed our chain scales by 60 basis points, increasing 2.3% year-over-year. This was driven by a 30 basis point improvement in occupancy levels and a 1.7% year-over-year increase in average daily rates. Our domestic extended stay segment performed exceptionally well, achieving first quarter RevPAR growth of 6.8% over prior year and outperformed the industry by over 4 percentage points.

Pat Pacious
Pat Pacious
President and CEO at Choice Hotels

At the same time, our domestic overall mid-scale segment achieved first quarter RevPAR growth of 1.7% over the prior year, outperforming its chain scale by 30 basis points. While our domestic economy segment achieved first quarter RevPAR growth of 7.1% over the prior year, outperforming its chain scale by over 4 percentage points. Turning to our third royalty growth lever, our effective royalty rate also continues to be a significant source of revenue growth. Our domestic system effective royalty rate for the first quarter increased 8 basis points year-over-year. This performance demonstrates the positive impact of our strategy to drive the growth of our revenue-intense brand portfolio and our enhanced value proposition to franchise owners.

Pat Pacious
Pat Pacious
President and CEO at Choice Hotels

We are optimistic about the ongoing upward trajectory of our effective royalty rate for years to come, as the contracts in our domestic pipeline have a significantly higher effective royalty rate than those in our current portfolio of open hotels. We continue to build on the strong momentum of our partnership business. Our partnership services and fees encompass revenues from our strategic partners and vendors, including licensing and co-brand credit card fees. These revenues increased 28% year-over-year in the first quarter and benefited from both an increase in revenues from our qualified vendors and co-brand credit card fees. Continuing to expand our partnership services and fees is one of our key initiatives, and we believe that we can drive strong revenue growth in the years ahead. In the three months ended March 31, 2025, we generated $36 million in adjusted free cash flows, a 30% year-over-year increase.

Pat Pacious
Pat Pacious
President and CEO at Choice Hotels

Our business continues to produce strong cash flow, which, coupled with our well-positioned balance sheet, allows us to execute our capital allocation priorities, including investing in the growth initiatives while also returning significant capital to shareholders. Year-to-date through April, we've returned $115 million to shareholders, including $27 million in cash dividends and $88 million in share repurchases. We had 3.2 million shares remaining in our authorization as of the end of April. We remain well-positioned with a strong cash position, leverage levels at the low end of our targeted range, and total available liquidity of $594 million as of March 31, 2025. Before discussing our outlook, I want to note a few changes we made to our income statement. During the first quarter, we reclassified select items to classify revenue and expenses based on the nature of the underlying activities and also reclassified corresponding prior year amounts for comparability.

Pat Pacious
Pat Pacious
President and CEO at Choice Hotels

These reclassifications have no effect on previously reported total revenues, expenses, or net income amounts. For additional information on these reclassifications, please see our earnings release and Form 10-Q. Finally, I'd like to discuss our expectations for the remainder of the year. Reflecting the more uncertain macroeconomic backdrop, which is impacting the lodging industry, we are updating our full year 2025 outlook. While January and February domestic RevPAR performed in line with our expectations, we started to observe a softening in late March when a broader macro uncertainty intensified. As a reminder, April saw the significant impact of the Easter shift and a tougher comparison as we benefited from eclipse-related travel in 2024. When normalizing for these impacts and accounting for the hurricane benefit, April RevPAR performance was down approximately 1% year-over-year.

Pat Pacious
Pat Pacious
President and CEO at Choice Hotels

Given these recent trends, we are adjusting our domestic RevPAR expectations to negative 1% to positive 1%. The high end of our range assumes our RevPAR performance for the remainder of the year is largely in line with the outlook we provided in February. The midpoint of this range assumes that the current trends we have seen from late March through April continue for the remainder of the year, and the low end implies that conditions soften modestly. For the full year 2025, we now expect our adjusted EBITDA to be in the range of $615 million-$635 million, and adjusted diluted earnings per share to be in the range of $6.90-$7.22. This guidance adjustment reflects a more moderate domestic RevPAR growth expectation, offset by effective cost management.

Pat Pacious
Pat Pacious
President and CEO at Choice Hotels

We now anticipate our guidance for full year adjusted SG&A to be at the lower end of our growth range of low to mid-single digits from the 2024 base of $276 million. Additionally, to align with the revenue reclassifications that I discussed, we are now providing guidance for these reclassified line items. For full year 2025, we expect our partnership services and fees to grow in the mid-single digits from the 2024 base of $99 million. While we recognize the broad macro uncertainty, we remain confident in the resilience of our portfolio, the versatility of our model, and the strength of our fee-based business. We anticipate growth will be driven by organic growth across more revenue-intense hotels and markets, robust effective royalty rate growth, growth from our partnership revenue streams, strong international business, and incremental revenue-generating opportunities from our expanded scale.

Pat Pacious
Pat Pacious
President and CEO at Choice Hotels

This outlook does not account for any additional M&A, repurchase of the company's stock after April 30, or other capital markets activity. Today's results are a testament that our strategy is working and that we are benefiting from our expanded scale and versatile business model. We intend to keep investing in those areas of our business that will generate the highest return on our capital. At this time, Pat and I would be happy to answer any of your questions. Operator?

Operator

Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press Star, followed by the one on your touch-tone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press Star, followed by the two. If you are using a speakerphone, please lift the handset before pressing any keys.

Operator

First question comes from Shaun Kelley with Bank of America. Please go ahead.

Shaun Kelley
Shaun Kelley
Managing Director at Bank of America

Hi, good morning, everybody. Thank you for taking my questions. Pat or Scott, maybe we could just start with your big picture on the consumer and the macro. Pat, you talked a little bit about how you're well-positioned for trade down. What's sort of unique as we've moved through earnings season here is we've seen the softness primarily in leisure and lower-end chain scales relative to the industry, and the high-end has been hanging in a little bit better. Kind of when or how do you expect to see a little bit of that trade down, and why do you think that the softness we've seen so far has been so acute in kind of the lower-end travel segment right now?

Pat Pacious
Pat Pacious
President and CEO at Choice Hotels

Yeah. Let me start, Shaun, with just over the macro.

Pat Pacious
Pat Pacious
President and CEO at Choice Hotels

I mean, if you look at our Q1 results, it really demonstrates that our strategy is continuing to deliver. You look at our 3-4% net rooms growth, record EBITDA, RevPAR outperforming our chain scales, RPI increases. We've got an increased international footprint. Scott talked about our expanded partnership streams. Most importantly, probably is our rewards program growth. What we really wanted to make sure everybody understands in our remarks is the change in the consumer profile that we now have in our business. You look at the diversified places where our consumers are coming from now. We've got a higher income consumer today than we've had in the past. That average consumer is reporting that they've got 24% higher national median household income than the U.S. average, and 20% are over $200,000. We've got a stronger consumer in our business.

Pat Pacious
Pat Pacious
President and CEO at Choice Hotels

We talked about we've got more business travelers. 40% of our business in Q1 is now business travel. I think when you look at trade down, what we're not seeing is trade down in our system. We are seeing, though, market share gains in our system. I want to particularly point to our economy segment, which was up 7%, which is 4% higher than the chain scale, and extended stay, which was also up 7%, which is 4% higher than the chain scale did. We are taking share. That's clearly what we saw in the early part of the quarter here, or the early part of the year, that is.

Pat Pacious
Pat Pacious
President and CEO at Choice Hotels

I would just say, with what we're seeing through April, and then even in the looking at last week, we again saw RevPAR index gains, primarily in occupancy, which is really a positive signal for us. When you look at this sentiment out there that leisure is softening, we're not actually being impacted in a meaningful way by that, because I think what's happening is, which happens in these times when things get softer, we are taking share, and that has historically happened. While we're in the early days of this sort of softening cycle, we're pretty optimistic that the way we've repositioned our brands, the way our consumer has gotten that much more resilient from an income perspective, and then the diversification between business and leisure travel, I think is really going to benefit us as we move throughout the rest of the year.

Shaun Kelley
Shaun Kelley
Managing Director at Bank of America

Great. And then just as a follow-up on the net unit growth side of the equation, could we just talk about sort of ex-Westgate your organic growth expectations as we move through the balance of the year? Is the implication that net rooms accelerates, and sort of why would we see a pattern there relative to kind of what you saw in the first quarter?

Pat Pacious
Pat Pacious
President and CEO at Choice Hotels

Yeah, I think let me just start. I mean, I think we're really confident in our guidance of about a 1% worldwide rooms growth. International continues to be a key driver of that growth. International is now expected to be in that kind of high single digits. And then I think the second piece of it is our historical competency around conversions.

Pat Pacious
Pat Pacious
President and CEO at Choice Hotels

The real focus, as we mentioned in our remarks, is the velocity with which we're able to move projects from pipeline into our system. As we mentioned, we opened 170 hotels within that last 12-month timeframe, which is actually a 26% increase. We're seeing the velocity improving. We're in a world right now where 73% in Q1 of our openings were from conversion hotels.

Allie Summers
Allie Summers
Senior Director of Investor Relations at Choice Hotels

Yeah. Can I also just point out, as you think about it, historically, our first quarter has been more of a higher of a termination rate for us. As the year goes on, those tend to go down. It's just the timing and the cycle of when our contracts are executed when we make our portfolio management decisions.

Allie Summers
Allie Summers
Senior Director of Investor Relations at Choice Hotels

As Pat said, the great news is our brands remain in high demand and still seeing great activity on the executed contract front, people wanting to affiliate with our strong brands, especially in times of uncertainty.

Shaun Kelley
Shaun Kelley
Managing Director at Bank of America

Thank you both.

Operator

Your next question comes from Michael Bellisario with Baird. Please go ahead.

Michael Bellisario
Michael Bellisario
Senior Research Analyst at Baird

Thanks. Good morning, everyone.

Pat Pacious
Pat Pacious
President and CEO at Choice Hotels

Morning.

Michael Bellisario
Michael Bellisario
Senior Research Analyst at Baird

Good morning. Got a question for you just on guidance. Just trying to walk through the math here. RevPAR is roughly flat. Unit growth's one. You get a little bit from royalty rate growth. You call that 2% fee growth. I think you're saying ancillary fees are going to be plus 5%. Is that spread, call it 3 percentage points, is one, is that the right math? And then sort of for how long do you think that ancillary fee growth can outpace sort of the organic growth rates?

Michael Bellisario
Michael Bellisario
Senior Research Analyst at Baird

You'll call it plus or minus 3% or more going forward?

Pat Pacious
Pat Pacious
President and CEO at Choice Hotels

Yes, sir. Thanks, Michael. As we previously discussed, the versatility of our business model really provides us a lot of multiple drivers to grow our business. When you think about our guidance, our domestic royalty rate growth is expected to contribute about 1-2% growth to our EBITDA. That's despite a flat RevPAR environment because we are growing our revenue-intense brands as well as continuing to grow the effective royalty rate at that mid-single digits. Our partnership service and fees and our franchisee platform ancillary services, which include things like our co-brand credit card, continues to be accretive to our EBITDA and is expected to be about a 2% growth to our EBITDA for 2025.

Pat Pacious
Pat Pacious
President and CEO at Choice Hotels

We have our international business and owned hotel portfolio, which we think will add about 1% growth to the EBITDA results. These will be slightly offset by very small increases in our SG&A. That is how you get to kind of the midpoint of our guidance. In terms of our ability to grow those ancillary revenues, for us, we really think that is a huge opportunity for us. They are not dependent on RevPAR. They certainly can be accelerated by the growth of our franchise system, but we have got a lot of different avenues to monetize our franchise system, whether that is through selling value-added services to our franchisees to help drive the performance of their hotel, whether it is connecting third-party partners with the vast amount of guests and our loyalty members that come through our channels.

Pat Pacious
Pat Pacious
President and CEO at Choice Hotels

We believe that that could continue to grow at an accelerated pace for the long term, even potentially at a higher rate than the core franchising royalty fees.

Michael Bellisario
Michael Bellisario
Senior Research Analyst at Baird

Okay. That's helpful. Just as my follow-up, just on the topic of development, Pat, any commentary that you could share maybe from franchisees either recently or from your convention last week, just maybe what they're seeing, and are they asking for anything differently today? That's all for me. Thank you.

Pat Pacious
Pat Pacious
President and CEO at Choice Hotels

Yeah. No, it's great. We literally last week spent about four days with between 5,000 and 6,000 of our franchisees and our vendors as well. We got a really good take on sort of what the inputs to development look like as well. Let me just start with the franchisees.

Pat Pacious
Pat Pacious
President and CEO at Choice Hotels

I would say we were really happy with how optimistic they were relative to everything that you're reading in the headlines. That was a key positive. What they were telling us is what we saw in Q1, which is their hotels are doing better than their peers in the market, which I think reflects the investments we made in the back half of 2024. Things like our loyalty program, our website, and our revenue optimization service, those three things in particular, they're really responding to. That is flowing then into development. Clearly, extended stay continues to be a very sought-after segment for us. When you look at the brands that we have there, you have a proven prototype, you have a proven operating model, and you have a proven exit. That segment continues to be very attractive to owners.

Pat Pacious
Pat Pacious
President and CEO at Choice Hotels

I think it's also interesting to note because when times get uncertain, people want certain brands, and that's really where Choice has excelled over the years. We have brands with very high brand awareness and a long history and track record of success. We have a lot of owners who are—I say when it starts to rain, people who are independent hotels or maybe in a different brand, we tend to attract more hotels during times of uncertainty because we have those proven brands. We had a lot of interest, I think, in our soft brand and upscale. We've got a lot of interest, obviously, in our core enterprise, which is primarily a conversion brand. The development team was pretty optimistic coming out of our convention. I think from that standpoint, owners are—they particularly are ownership-based.

Pat Pacious
Pat Pacious
President and CEO at Choice Hotels

Many of them have been with us for decades. They know that in a period where we're in right now, where supply really hasn't grown much over the last three years, it's been sub 1%, and you see this really strong consumer, that's a really healthy environment to start developing hotels in so that by the time you do open your hotel, you're into a significant uptick in RevPAR. I would say we were pretty pleased by the optimism that our owners were showing. Just on the trade show side of the house, it was also very interesting to talk to our vendors. Many of them have gotten ahead of the whole tariff impact by bringing inventory here sooner. Secondly, many of them told us they have figured out ways not to pass that cost on to the owners.

Pat Pacious
Pat Pacious
President and CEO at Choice Hotels

So anybody who was talking about a price increase, it was usually 10%. That seemed to be the number we were hearing, which is very absorbable in the way our franchisees are thinking about development moving forward.

Michael Bellisario
Michael Bellisario
Senior Research Analyst at Baird

Thank you.

Operator

Your next question comes from Patrick Scholes with Truist Securities. Please go ahead. Great.

Patrick Scholes
Patrick Scholes
Managing Director and Senior Analyst at Truist Securities

Thank you. Good morning, everyone.

Pat Pacious
Pat Pacious
President and CEO at Choice Hotels

Morning.

Allie Summers
Allie Summers
Senior Director of Investor Relations at Choice Hotels

Morning.

Patrick Scholes
Patrick Scholes
Managing Director and Senior Analyst at Truist Securities

On the economy and mid-scale significant outperformance versus the average in the Smith Travel Research results, I hear what you said, certainly taking market share. Was there anything else above and beyond market share, such as where your locations are concentrated, such as anything such as a hurricane tailwind helping you in the quarter? Thank you. And then I have a follow-up.

Pat Pacious
Pat Pacious
President and CEO at Choice Hotels

Yeah. I think, Patrick, in the short term, it's the things that we've been talking about for quite some time, things like road trips.

Pat Pacious
Pat Pacious
President and CEO at Choice Hotels

Gas prices are the lowest they've been in three years. We are seeing those hotels that are in more drive-through locations performing well. What's interesting is we have the ability today to pulse our travelers. We did a survey as this whole sort of economic uncertainty began to develop in late March and April. 90% of them told us they were going to travel as much or more than they did last year. They said that they see prices are rising, but they said they're going to find ways to cut back by basically driving instead of flying, taking vacations in more affordable places, and traveling domestically as opposed to internationally. That's our customers. It's not industry surveys. These are our abilities to actually talk to our existing customer base. That's what they're telling us.

Pat Pacious
Pat Pacious
President and CEO at Choice Hotels

I think the long-term trends we've been talking about as well, the reshoring of American manufacturing, those are the things that are driving more extended stay and mid-scale stayers. We are beginning to see some of that as well. We've also talked about the retirees, the 4 million additional people reaching retirement age this year. Our brands are well-positioned for those who are traveling and looking for an affordable option where they're no longer working and they're living on more of a limited income. Those are all areas that I think, as we've looked into what's driving our Q1 performance and why we're taking share, those are some of the key drivers. Yeah.

Allie Summers
Allie Summers
Senior Director of Investor Relations at Choice Hotels

The only thing I'll add to that, Patrick, is just when we look at our business travel, Pat mentioned earlier in our remarks that it's up to 40% of our mix. We saw really strong growth in our business travel, which was up 10%. I think what's great about our business travel, it's really business travelers where their job can't be accomplished without traveling. We've been making investments in our capabilities to drive more business travel with an expanded sales force, going after new segments and verticals, and really improving the effectiveness of our sales tools. We really saw that come to fruition here, starting last in the fourth quarter and carrying into the first quarter. I point to that as another reason for our outperformance.

Patrick Scholes
Patrick Scholes
Managing Director and Senior Analyst at Truist Securities

Okay. Yeah. Thank you.

Patrick Scholes
Patrick Scholes
Managing Director and Senior Analyst at Truist Securities

Now, my follow-up question, I do have to ask, while you certainly excelled in the mid-scale economy, when I look at the upscale and above RevPAR, that did seem to be significantly lower than what would be implied in the Smith Travel. Can you give a little bit of color on that? Is there something idiosyncratic on that, how we should think about upscale and above? Thank you.

Pat Pacious
Pat Pacious
President and CEO at Choice Hotels

Yeah. Really, for that, we report our RevPAR results on a full system basis. It is not a same-store sales basis. Really, the decline was due to a few properties leaving as well as some newer properties ramping. When we look at it on a same-store sales basis, actually, our upscale was slightly positive for the quarter.

Pat Pacious
Pat Pacious
President and CEO at Choice Hotels

A little bit of noise and just some of the shift of the portfolio that will even out here as the year goes on.

Patrick Scholes
Patrick Scholes
Managing Director and Senior Analyst at Truist Securities

Just quickly, follow up. On the same-store basis for your outperforming, is that apples to apples as well with that outperformance?

Pat Pacious
Pat Pacious
President and CEO at Choice Hotels

Apples to apples in what regard?

Patrick Scholes
Patrick Scholes
Managing Director and Senior Analyst at Truist Securities

Apples to apples. Just how the upscale underperformance was not really an underperformance. Is the outperformance in your economy mid-scale, is that an apples to apples outperformance?

Pat Pacious
Pat Pacious
President and CEO at Choice Hotels

Yes. I understand. Yes, it is. Just with upscale, it is just a little bit of a smaller portfolio. A few hotels can move the numbers a little bit more than our broader portfolio.

Patrick Scholes
Patrick Scholes
Managing Director and Senior Analyst at Truist Securities

Great. Thank you for the clarification. I am all set.

Operator

Next question comes from Robin Farley with UBS. Please go ahead.

Robin Farley
Robin Farley
Managing Director at UBS

Great. Thank you.

Robin Farley
Robin Farley
Managing Director at UBS

Just looking at the rooms in your pipeline at the end of the quarter, it seems like it ticked down each quarter for the last four quarters. Is the unit growth that you're looking for, is that mostly that there's an acceleration in conversions or something that it may not be showing up in the pipeline, or just how should we think about that sort of tick down? Thank you.

Pat Pacious
Pat Pacious
President and CEO at Choice Hotels

Yeah. Robin, I mean, when you look at our global pipeline, about 83% is domestic, about 17% is international. And then when you tease out new construct versus conversion, it's like two-thirds new construct, one-third conversion. As we've talked about, it's the velocity of the hotels on the conversion side that move through very quickly. On average, it's like three months. In many cases, we have hotels that just don't sit in our pipeline.

Pat Pacious
Pat Pacious
President and CEO at Choice Hotels

As we look across the industry, a lot of these pipelines are getting bigger and bigger, but they're not resulting in actually open hotels. What we saw in the first quarter, actually, was a significant amount of openings kind of getting through that pipeline as well. I think, as Scott may have mentioned earlier, Q1 is a period where we generally do some pipeline cleanup as well. It does not make sense for us to have a proposed hotel coming into a market when we have another owner who's ready to develop in that market. That is really, I think, a reflection of what you're seeing there.

Robin Farley
Robin Farley
Managing Director at UBS

When you talk about the two-thirds new construction, one-third conversions, did I hear that right in terms of your pipeline?

Pat Pacious
Pat Pacious
President and CEO at Choice Hotels

Yeah. That is within the pipeline.

Pat Pacious
Pat Pacious
President and CEO at Choice Hotels

That's really a reflection of the fact that a new construction hotel will be in your pipeline longer, just given the longer time from contract execution to actually construction and opening the hotel. As Pat mentioned, that velocity of our conversions in the pipeline, even though that's 73% of our openings during the first quarter are conversions, we open a hotel within a three- to six-month period if it's a conversion. They don't sit in our pipeline very long. We even have instances where something could be sold and opened in the same quarter. Historically, while our openings have been more two-thirds conversions, one-third new construction, the pipeline actually is the inverse of that, just given the time to open.

Robin Farley
Robin Farley
Managing Director at UBS

Do you have that mix sort of compared to 12 months ago, that two-thirds new construction, one-third conversion? That's my last one. Thanks.

Pat Pacious
Pat Pacious
President and CEO at Choice Hotels

It's probably the same, Robin. I mean, that's been a pretty consistent mix for us for quite some time.

Robin Farley
Robin Farley
Managing Director at UBS

Okay. Thank you.

Operator

Next question comes from Meredith Jensen with HSBC. Please go ahead.

Meredith Jensen
Meredith Jensen
Senior Equity Analyst at HSBC

Yes. Thanks. Good morning. I was wondering, given you were speaking about the strong business demand and also how that might feed into length of stay, because business may stay shorter, then you offset that with extended stay having longer. So I was wondering if you might speak to kind of the trends in length of stay and how some of those segments are booking in terms of also the booking window. That would be great.

Pat Pacious
Pat Pacious
President and CEO at Choice Hotels

Yeah. Just briefly on the booking window, I think what we've seen is the window has contracted somewhat. And that's a reflection of this sort of uncertain environment because that contraction was within the last six weeks or so.

Pat Pacious
Pat Pacious
President and CEO at Choice Hotels

That being said, the business is showing up. As I mentioned last week, our year-over-year pace actually increased. The people are not booking as far out in advance, but they are ending up at the end of the day traveling. I think when you look at our business mix within the segments, and then maybe Scott can speak at length to, say, extended stay, the business travel and group business was up 7% in the quarter. Upper mid-scale was up 4%. Upscale was up 22%. We are seeing a lot more group and business travel in our segments. When you look at extended stay, the length of stay is actually much longer. It is not actually a shorter business trip.

Pat Pacious
Pat Pacious
President and CEO at Choice Hotels

I would say that likely the business travelers that we're getting today, given the types of industry verticals we're pulling from, construction, logistics, medical staffing, these are more longer length of stay than our traditional leisure travelers.

Allie Summers
Allie Summers
Senior Director of Investor Relations at Choice Hotels

Yeah. I think I'll add, obviously, the length of stay is really driven by our focus on extended stay. We are the market leaders now in extended stay. We've been growing that segment, our rooms growth, by over 10% for the last couple of years. We really believe we can continue to grow that for the next several years, if not longer. Really, you're seeing the mix of our length of stay increase, given our focus on extended stay, as well as what I mentioned earlier is our focus on that business traveler. The two nicely dovetail together.

Allie Summers
Allie Summers
Senior Director of Investor Relations at Choice Hotels

We actually saw about quarter over Q1 versus Q1 of last year, about a 5 percentage point increase in our average length of stay of nights that are over 14-plus nights. Really, really good acceleration, kind of the type of business we're going after and the increase in our portfolio size and extended stay.

Meredith Jensen
Meredith Jensen
Senior Equity Analyst at HSBC

No, that's super helpful because I tend to think of the business demand staying in the upper upscale. But understandably, they're staying in the extended stay for your area. That would make it longer. Very quickly, if you wouldn't mind touching upon international and how sort of you look at expansion opportunities there, conversion, consolidation, M&A, any kind of color there would be great. Thank you very much.

Pat Pacious
Pat Pacious
President and CEO at Choice Hotels

Yeah. I think our international opportunity is really pretty exciting. We've been talking about that's a key growth area for us.

Pat Pacious
Pat Pacious
President and CEO at Choice Hotels

If you look at our kind of recent performance results, it's an area that we're improving both in the development and openings perspective as well. I think we feel pretty good about the opportunities we have. The Radisson acquisition really opened up and kind of created a new focus for us on the international segment. We're making significant progress in what we call CALA, the Caribbean and Latin America, particularly the Radisson brands themselves. They have a very high brand awareness down there. I think now being attached to our business delivery engine, we're getting a lot of really significant interest there. I was just up in Canada on Monday, Tuesday at our Canadian Hotel Investment Conference up there. We've been in that market for 70 years. We have very well-established brands there. We have about 362 hotels.

Pat Pacious
Pat Pacious
President and CEO at Choice Hotels

That is another area that is really ripe for extended stay growth. With our presence there, our long history of operating performance, we do see opportunity there. Canada has got very similar sort of supply and demand characteristics as here in the U.S. There is a lot of real interesting opportunity for us from a growth perspective on the international front.

Meredith Jensen
Meredith Jensen
Senior Equity Analyst at HSBC

Thanks so much.

Operator

Again, if you would like to ask a question, please press star one on your telephone keypad. Your next question comes from Dan Wasiolek with Morningstar. Please go ahead.

Dan Wasiolek
Dan Wasiolek
Senior Equity Analyst at Morningstar

Good morning, guys. Thanks for taking the question. Maybe just one.

Dan Wasiolek
Dan Wasiolek
Senior Equity Analyst at Morningstar

With the April normalized RevPAR being down 1%, wondering if you could maybe talk about how leisure group business performed in that month relative to kind of March and then how those three groups are kind of being viewed in your updated RevPAR guidance. Thank you.

Pat Pacious
Pat Pacious
President and CEO at Choice Hotels

Yeah. Dan, I think the challenge with April was the Easter shift and the eclipse. We had a number of hotels that were right in the line of the eclipse. They were con lodges in the middle of the country going for $700 a night in rooms. April has been really hard to sort of tease out, can you see any specific patterns with regard to leisure travel? Obviously, the Easter shift, which we deal with on a continuous basis every year, made it a little bit more challenging.

Pat Pacious
Pat Pacious
President and CEO at Choice Hotels

I'm not sure there's anything in specific we can read through on leisure in the month of April that is indicative. We've really kind of looked more at the long term. We've looked at the reasons for optimism for the summer are really the key reasons that have always driven our business, which is employment remains high, gas prices are low, and consumers appear to be saying they're going to drive to as opposed to fly. That generally does really well for our hotels that are right next to the highway, 1,500 hotels near the national parks. These are the things that, as consumers bow back on their spend, but not on their travel, they tend to go to these types of locations.

Pat Pacious
Pat Pacious
President and CEO at Choice Hotels

That is really when we look at when we surveyed our customers and we look at talking to our franchisees last week who are in some of those markets, that is what gives us sort of the optimism around being able to perform at the top or at the upper end of our range.

Dan Wasiolek
Dan Wasiolek
Senior Equity Analyst at Morningstar

Okay. Fair enough. And then just clarification question on the business being 40% of your business. Is that revenue? Is that room nights? Does that include group, or would group be separate?

Pat Pacious
Pat Pacious
President and CEO at Choice Hotels

It is revenue, and group is a mix of both business and leisure. Group overall is about 10% of our total delivery in the quarter. So yeah, business is a revenue number.

Dan Wasiolek
Dan Wasiolek
Senior Equity Analyst at Morningstar

Okay. Perfect. Thank you.

Operator

No further questions. Please continue.

Pat Pacious
Pat Pacious
President and CEO at Choice Hotels

Thank you, operator. Thanks, everyone, again for your time this morning.

Pat Pacious
Pat Pacious
President and CEO at Choice Hotels

We will talk to you again in August when we announce our second quarter 2025 results. Have a great rest of your day.

Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.

Analysts
    • Shaun Kelley
      Managing Director at Bank of America
    • Dan Wasiolek
      Senior Equity Analyst at Morningstar
    • Allie Summers
      Senior Director of Investor Relations at Choice Hotels
    • Meredith Jensen
      Senior Equity Analyst at HSBC
    • Robin Farley
      Managing Director at UBS
    • Pat Pacious
      President and CEO at Choice Hotels
    • Patrick Scholes
      Managing Director and Senior Analyst at Truist Securities
    • Michael Bellisario
      Senior Research Analyst at Baird
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